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Pfizer's
PFE 2.5371687136393017%Pfizer Inc.U.S.: NYSEUSD31.725
0.7852.5371687136393017%
/Date(1481302517920-0600)/
Volume (Delayed 15m)
:
9148277
P/E Ratio
31.575422885572138Market Cap
187754906336.554
Dividend Yield
3.7815165772232953% Rev. per Employee
543861More quote details and news »PFEinYour ValueYour ChangeShort position
new CEO, Ian Read, has been dealt a tough hand, in view of the string of looming patent expirations on key drugs. But some investors argue there is much he can do to boost Pfizer's depressed stock.

The decision to replace Jeff Kindler, who retired as CEO suddenly last week, with Read, a 32-year company veteran, gives Pfizer the opportunity to implement a series of steps that could involve asset divestitures, increased share repurchases, higher dividends and possible reductions in the company's huge research-and- development budget, now running at $9 billion annually.

Such moves could help boost Pfizer shares (ticker: PFE), now trading below 17, or for just 7.6 times projected 2010 operating profits of $2.22 a share. The shares sport a dividend yield of 4.3%.

Pfizer's new boss, Ian Read, could take many steps to lift the company's depressed stock price.
Pfizer Inc. via Bloomberg

Pfizer's low price/earnings ratio reflects Wall Street's low expectations for earnings growth through 2015, as the New York-based company deals with patent expirations—and resulting declines in revenue and profit—on drugs such as Lipitor, Celebrex and Viagra. Pfizer's shares barely budged last week after the management change was announced. The stock, down 66% from a 1999 peak, might well be considered the poster child for Big Pharma's woes, which include a history of overpriced acquisitions and a drug pipeline of dwindling value.

Yet Pfizer looks appealing, in part because of its low P/E. The company generates about $20 billion in annual cash from operations, and sets aside $13 billion for dividends, capital expenditures and debt reduction. Shares probably would rally into the mid-$20s if the company committed to spending more money on some shareholder-friendly actions.

Pfizer has begun buying back stock following a hiatus after its $68 billion purchase of Wyeth in 2009, but the purchases have been modest so far, at $1 billion in 2010. A more aggressive buyback of $5 billion to $6 billion annually in the next five years could lift the company's profit to more than $2.60 a share by 2015, speculates one shareholder. An even bigger buyback program of $8 billion to $9 billion annually could lift profit to almost $2.90 a share by 2015.

Pfizer has indicated it might boost its annual dividend, now 72 cents a share, and analysts expect a 10% increase next year. A large share-buyback program, combined with a nice dividend boost, could lift the stock into the $20-to-$25 range in the next year.

One indication of Pfizer's willingness to take a hard look at its business will be its choice of board chairman, which could come in the next week. Wall Street probably would cheer if current board member Jim Kilts gets the job, given his past success as CEO of both Nabisco and Gillette. Investors might be less pleased if the nod goes to former Pfizer CEO and current board member William Steere.

PFIZER'S DRUG-DEVELOPMENT RECORD has been terrible in the past decade. The company spent an estimated $72 billion on research and development, with little to show for it. But Bernstein analyst Tim Anderson, who recently upgraded the stock to Outperform from Market Perform, says the new-drug pipeline is improving. "The buy case for Pfizer has been based largely on high cash generation translating into dividends and buybacks," says Anderson, who has a price target of 21. "The [P/E] multiple should expand if it can get new products out the door."

Anderson is excited about several Pfizer drugs in development, notably the rheumatoid-arthritis treatment Tasocitinib, which had promising results in clinical trials. The market is huge at $12 billion annually, and Anderson thinks Tasocitinib could generate $1.4 billion in annual sales by 2015. That estimate could prove conservative.

The Bottom Line

Pfizer's stock looks appealing at just 7.6 times expected earnings. A big stock buyback and dividend hike could lift the shares to the 20-to-25 range in the next year.

The Wyeth deal is considered a positive because it could help get Pfizer through next year's Lipitor patent expiration without a big financial hit. Lipitor generates $11 billion in annual revenue. One negative is the combined company's size; it will be tough for new drugs to have much impact, given Pfizer's estimated sales of $67 billion in 2010.

Pfizer might spin off or sell some higher-value businesses, including animal health, consumer health and infant nutritionals. These businesses command a premium valuation of at least 15 times earnings, about double Pfizer's current P/E. By selling or splitting them off, Pfizer could retire a significant number of shares. These divisions could be valued at $27 billion, or some 20% of Pfizer's market value of $135 billion.

Pfizer has enormous earnings power and multiple ways to deliver for shareholders. Its new CEO ought to consider bold actions to boost its stock.

No Magic Pills

Many drug makers have been penalized by Wall Street for weak pipelines and patent expirations on key products. Pfizer is one of the cheapest names in the group.